IMF Staff Completes 2024 Article IV Mission to Indonesia
IMF News, June 14, 2024
Source details
- Canonical URL
- IMF Staff Completes 2024 Article IV Mission to Indonesia
Other formats
Bibliographic details
- Published: June 14, 2024
Mission overview and key projections
- Press Release No. 24/221; mission conducted from May 23 to June 6, 2024; led by Ms. Maria Gonzalez.
- Growth projections:
- 5.0 percent in 2024.
- 5.1 percent in 2025.
- Inflation:
- Headline and core inflation would remain comfortably in the target range.
- Inflation is projected to converge to the mid-point of the target range over time.
- External sector:
- Real exports would expand at a slower pace while import growth would recover in line with domestic demand, leading to moderate current account deficits in 2024-25.
- The balance of payments surplus will continue to strengthen over time, reflecting a pickup of FDI and portfolio inflows, supporting a further buildup of reserve buffers.
- Fiscal stance:
- Following a decisive post-pandemic consolidation, Indonesia’s fiscal deficit narrowed in 2023, anchored by the first primary surplus in about a decade.
- The fiscal stance would become expansionary in 2024-25; a slightly narrower deficit would both support growth and a more balanced policy mix while also preserving policy space to respond to downside risks.
- Financial sector:
- The Financial Sector Assessment Program (FSAP) found the financial system to be resilient.
- Banks are profitable, and their capital and liquidity ratios significantly exceed regulatory minima.
- Credit growth has recovered to pre-pandemic rates.
Risks and scenarios
- External downside risks:
- Commodity price volatility (e.g., from geopolitical shocks).
- A slowdown in Indonesia’s key trading partners.
- Spillovers from high-for-longer policy rates in advanced economies (AEs).
- Domestic downside risk:
- A weakening of long-standing sound macro-fiscal frameworks could hamper policy credibility.
- Upside scenarios:
- Stronger-than-anticipated growth in trading partners.
- An earlier-than-expected monetary policy easing.
- Deeper-than-envisaged structural reforms raising growth over the medium term.
- Shock management:
- In Indonesia’s shallow FX markets, shifts in market sentiment may trigger outflows and destabilizing spikes in premia.
- The use of FXI may be appropriate under certain conditions to mitigate such shocks.
- Preserving buffers will be particularly important amid geoeconomic fragmentation which may lead to more frequent and volatile external shocks, including to capital flows and commodity prices.
Fiscal policy findings and recommendations
- Fiscal credibility and rule:
- Indonesia’s fiscal rule—its 3 percent of GDP deficit cap—remains well-suited to support its Golden Vision, especially if supported with a strengthening of fiscal revenues to boost high-quality development spending that would preserve fiscal prudence.
- Near-term measures:
- Enhancing the energy subsidy targeting and raising revenues, including from legislated and further tax policy measures, would create space for more growth-friendly spending in the near term.
- Medium-term priorities:
- Preserve hard-earned policy credibility.
- Keep fiscal risks—including from contingent liabilities—well contained.
- Strengthen fiscal revenues to finance high-quality development spending.
Monetary policy and financial sector recommendations
- Monetary stance:
- The monetary policy stance remains broadly adequate.
- Recent policy rate hikes by Bank Indonesia (BI) sought to fend-off possible imported inflation pressures from rupiah depreciation.
- With the policy rate above neutral, financial risks contained, and ample liquidity, accommodative macroprudential policy has supported credit growth.
- Monetary policy should remain data-driven, calibrated to the impact of developments on domestic conditions, and supported by a flexible exchange rate serving as a shock absorber.
- Market and instruments:
- BI’s recently introduced instruments seek to facilitate money market development and attract capital flows into the short end of the curve; efforts could continue to be bolstered to enhance policy effectiveness.
- FX reserve buffers remain adequate.
- Macroprudential policy:
- BI is implementing the macro-prudential mandate through a three-pronged strategy:
- (i) maintaining financial resilience by mitigating risk propagation from interconnectedness and contagion;
- (ii) managing balanced and sustainable intermediation to tackle procyclicality;
- (iii) supporting financial inclusion.
- Clarifying that financial system resilience takes priority amongst objectives as the macroprudential toolkit is calibrated would enhance communication and effectiveness.
- As the credit gap continues to close, gradually shifting towards a neutral macroprudential policy (MPP) stance would help contain the build-up of macro-financial risks.
- Bank-sovereign nexus:
- A tighter “bank-sovereign nexus”—due to holdings of sovereign bonds and SOE lending—poses risks, but banks appear resilient.
Structural reforms, Golden Vision, and trade/FDI policy
- Golden Vision and policy mix:
- The authorities are pursuing an ambitious growth agenda in their Golden Vision to reach high-income status by 2045.
- This is supported by public spending (including on education, social programs, and infrastructure), institutional reforms (including to enhance the labor market, business environment and financial sector), and Industrial Policy (IP), which aims to increase the value-added of exports in selected sectors.
- Reform priorities:
- Comprehensive horizontal structural reforms in governance and anti-corruption, infrastructure, export complexity, human capital, labor resilience, and economic openness.
- These reforms are essential to bridge structural gaps and help meet ambitions for strong, sustainable and broadly shared growth.
- Industrial Policy and trade openness:
- As IP is deployed, careful design is important to ensure that it targets well-identified market failures in a time-bound and cost-effective way, anchored by strong governance frameworks.
- Supporting Indonesia’s attractiveness to trade and FDI would help mitigate geoeconomic fragmentation risks: securing transparent, simple, and predictable investment and business frameworks would help build resilience against reshoring pressures and attract new investment flows.
- Transitioning away from the use of non-tariff measures (NTMs) will be critical to sustain strong and inclusive growth while supporting global economic integration.
Engagement and acknowledgments
- The IMF team met with officials in the government, Bank Indonesia, Financial Services Authority (OJK), other public agencies and representatives of the private sector and civil society.
- The team thanked the authorities and other interlocutors for frank and constructive discussions and excellent logistical support.
IMF Staff Completes 2024 Article IV Mission to Indonesia — Press Release No. 24/221